Rest supply chain worries about blockchain

Blockchain has been heralded as revolutionary for many industries, but no application of the technology has experienced the boom-and-bust of the hype cycle as much as the supply chain. By enabling secure and transparent transactions, blockchain has the potential to reduce inefficiencies and costs, while increasing trust and visibility among participants. Electronic bills of lading in particular have become a top-of-mind solution in this regard. But implementing blockchain in the supply chain has proven to have its own challenges, one of which is dramatized by the Prisoner’s Dilemma.

This classic element of game theory illustrates why two individuals may not cooperate even when it appears that it would be in their best interest to do so. Two prisoners are each given the option of either confessing to a crime or remaining silent. If both remain silent, they will receive a lesser sentence, but if one confesses and the other does not, the confessor will receive a lesser sentence, while the other will receive a more severe sentence. If both confess, both will receive harsher sentences.

This scenario can be applied to the general thinking around blockchain in the supply chain, whether it is correct or not. In a blockchain network, participants are encouraged to act in their own interest, which at the same time benefits the wider network. “Trustless” is a frequently used word in this case, as the lack of trust in others is negated by the trust in the network itself. If a participant decides to share information on the blockchain, the primary concern is that it risks disclosing information to its competitors. This is equivalent to confessing in the Prisoner’s Dilemma scenario. But if no one shares information, the benefits of the blockchain are never fully realized and the entire network suffers.

This created a perceived, but not entirely accurate, dilemma for participants in the blockchain network. Because of the public nature of transactions, some managers believed that if everyone shares information, everyone benefits. But if one decides not to share information, it gains a competitive advantage over the others. And if everyone decides to hold back, the benefits of blockchain are never realized and everyone suffers.

Businesses don’t like to feel like the only naked person on the beach. Absent requirements for 10-Q and 10-K forms, most companies would never disclose detailed financial information. This was the first stop in corporate adoption of public blockchain networks like Ethereum, and why they pushed for private, walled gardens like Tradelens, built on permissioned systems like Hyperledger. As we saw, however, these walled gardens never really realize the benefits of the technology to its full potential.

As the technology has matured and developed, blockchain no longer technically faces the same privacy concerns. Technologies such as zero-knowledge proofs and various types of privacy-preserving transactions on-chain as well as in layer-two systems enable companies to reap the benefits of public blockchains while protecting private competitive data.

Electronic bills of lading are a good example of how blockchain technology can be used in supply chain management and beat the hype cycle. Bills of lading are legal documents used in international trade that describe the details of a shipment, such as the quantity and type of goods being shipped, the destination, and the terms of sale. These documents are usually paper-based and can easily be lost or manipulated, leading to significant delays and costs.

Using blockchain technology, bills of lading can be digitized and secured, reducing the risk of fraud and increasing efficiency. However, adoption of blockchain-powered electronic bills of lading has been slow, due to general industry reluctance to embrace new technology, and the outdated perception of data exposure. Such fears now appear to be waning.

There is a significant commitment to adopting electronic bills of lading. According to a report by the World Economic Forum, it could save the global economy up to $1 trillion over the next decade. By reducing the risk of fraud and increasing efficiency, it has the potential to transform international trade. As a result of this huge upside, the Digital Container Shipping Association (DCSA), a consortium of nine leading ocean freighters, announced the transition to a fully standardized electronic bill of lading for the entire industry by 2030.

“The benefits of electronic bills of lading for all parties involved are obvious,” says Stefan Kukman, CEO of CargoX, a blockchain bill of lading provider that recently signed a partnership agreement with the Egyptian government. “The financial savings are significant, the time saved in delivering documents is remarkable, and the trustworthiness and reliability of electronic trade documents, especially on the blockchain, [are] fantastic.”

Blockchain moved from the industry’s golden child to pariah at a speed rarely seen in technology. Now, however, it promises to play a critical role in the IT infrastructure. We have moved past the initial hype and trudged through the “bottom of disillusionment”. Are we entering a golden age of supply chain blockchain use cases? It looks very promising.

John Monarch is a managing consultant at BX Advisors.